A recent decision from the U.S. District Court from the Northern District of Texas (Dallas Division) holds that Section 526(a)(4) of the amended Bankruptcy Code violates an attorney's First Amendment rights. The case is Hersch v. U.S., Civil action 05-2330. Judge David Godbey wrote the opinion.

In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") and it became effective in October 2005, although certain provisions became effective sooner.

The Plaintiff in this matter was Susan B. Hersh, a Dallas, TX attorney whose practice includes bankruptcy. She brought a cause of action against US Attorney General Alberto Gonzalez and Texas Attorney General Greg Abbott, as heads of the agencies charged with enforcing BAPCPA's provisions (collectively "Defendants" or the "Government").

Hersh sought declaratory judgement that BAPCPA Section 101 (defining attorneys as "debt relief agencies") does not apply to attorneys and also challenged the constitutionality of Sections 526(a)(4) and 527.

Section 526(a)(4) states that a debt relief agency may not "advise an assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title or to pay an attorney or bankruptcy petition preparer fee or charge for services performed as part of preparing for or representing a debtor in a case under this title".

The Court found that this provision unconstitutionally restricts Hersh's speech. There is no question that this section restricts what an attorney can tell a client. But, in order to regulate speech, the regulation has to be (1) narrowly tailored to promote (2) a compelling government interest. US v. Playboy Entm't Group, Inc., 529 U.S. 803 (2000).

The Court found that this section prevents lawyers from advising clients to take actions that are lawful, even under BAPCPA. The Court further states that taking on additional debt "in contemplation" of bankruptcy does not necessarily constitute abuse. The Court says that taking on more debt may be a prudent option for some people considering bankruptcy. As examples, it lists refinancing at lower rates to reduce payments or taking on secured debt such as a car loan that would survive bankruptcy and allow the debtor to continue to get to work. Section 526(a)(4) prevents attorneys from giving their clients their best advice.

The Court found that this law is over-inclusive in at least two respects in that it prevents lawyers from advising clients to take lawful actions and extends beyond abuse to prevent advice to take prudent actions. Therefore, this section imposes restrictions that are beyond what is "narrow and necessary".

The Court held that Section 527 which requires attorneys to provide "assisted persons" with written notice of specific information does not unconstitutionally compel speech. The Court reasons that the government clearly has a legitimate interest in attempting to ensure that a client is informed of certain basic information.

The Court stated that the plain meaning of Section 101 of BAPCPA indicates that "debt relief agency" includes bankruptcy attorneys. Further, legislative history shows that Congress intended to include attorneys within the scope of the definition for "debt relief agency".

Ray

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As most of us know, filings are down generally and, for those of us who work primarily in the reorganization process, they are at a 6 year low. In reviewing the Table F-2 U.S. Bankruptcy Courts Business and Nonbusiness Bankruptcy Cases Commenced, by Chapter of the Bankruptcy Code, During the Three Month Period Ended March 31, 2006, the total cases filed for "Total Business Filings for Chapter 11" are 1,291 for the quarter, dropping to their lowest level in six years, a 15% decline from last March (which was not a strong year either).

You can review all of the statistical information at the following address and then scroll down to Quarterly Filings and click on March 2006.

http://www.uscourts.gov/bnkrpctystats/statistics.htm#quarterly

Michelle

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Employees of a court-reporting company located in Washington D.C., "The Miller Reporting Co., Inc., who filed an involuntary bankruptcy petition seeking $12,000.00 in unpaid wages have now been paid and have asked the Court to drop the case. This company has been in business since 1960 and has transcribed the official business of congressional committees, and NASA. They have also transcribed events for many notable people such as Sidney Blumenthal, John Ashcroft, Monica Lewinsky and President Nixon.

Also last week a "credit card company filed a claim in the same case for more $80,000.00 including charges related to a convention for specialists on the assassination of President Kennedy, held in the District in May.

Mr. Kuntzler said the temporary cash-flow problems were caused by an estimated $1.5 million in estate taxes that he was forced to pay. He has run the company since the 2004 death of its founder and his longtime partner, Steven Miller.

I've resolved everything, he said of the company's debts."

The full article will be available on the Web for a limited time:

http://www.washingtontimes.com/metro/20060723-111342-2723r.htm

Pam

A recent 5th Circuit opinion (issued July 20, 2006) has determined that an individual debtor who was able to obtain a job after filing chapter 7 will have to account for that new income in a 707(b) motion to dismiss for substantial abuse. In this case, there was no finding by the bankruptcy court that the debtor had any awareness that he was about to get a job offer soon after filing his case. At the first meeting of creditors, the Trustee found out about the debtor's new job and promptly filed a motion under 707(b) to dismiss the case suggesting that the debtor (with his new income) could indeed fund a chapter 13 and that it was a substantial abuse to grant relief under chapter 7. The bankruptcy court disagreed and ruled that the debtor could proceed to discharge. That ruling was based in general on the fact that his new job was not in prospect when he filed and that the time for making a determination like this was at the petition date.

The district court and now the court of appeals reversed and held that the new income could indeed be considered in the 707(b) determination. In particular, the 5th Circuit (Circuit Judge King authored the opinion) relied on its analysis of 707(b):

Quote: Section 707(b) does not condition dismissal on the filing of bankruptcy being a "substantial abuse" but rather on the granting of relief, which suggests that in determining whether to dismiss under 707(b), a court may act on the basis of any development occurring before the discharge is granted.

Here is a link to this interesting case of first impression:

http://www.ca5.uscourts.gov/opinions/pub/05/05-10459-CV0.wpd.pdf

Mike

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Ford is in the 6th month of its turnaround plan, but mainly due to falling sales of trucks, this plan needs revision to accommodate falling revenue.

"Analysts at Ford began paying particular attention to monthly sales of pickups after industrywide pickup sales fell 6% in April. It was a crucial development.

Gas prices had been higher than consumers liked for more than a year, causing a steady exodus out of SUVs. But for the first time, the data suggested highly profitable pickup sales might be vulnerable, too.

In the past, pickup sales were largely viewed as resistant to increases in gas prices, since most full-size pickup buyers use the vehicle for work on farms and construction sites. But an estimated one-fourth of pickup buyers -- about 600,000 a year -- drive the big, powerful vehicles even though they don't need them."

Here is a link to the entire article from the Detroit Free Press:

http://www.freep.com/apps/pbcs.dll/article?AID=/20060722/BUSINESS01/607220376/1014

Mike